46. financial risk management objectives and...

Franshion Properties (China) Limited Annual Report 2013258

Notes to Financial Statements31 December 2013

46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIESThe Group’s principal financial instruments comprise bank loans and other borrowings and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and payables, which arise directly from its operations.

It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate riskThe Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long term debt obligations with floating interest rates.

The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. The Group’s policy is to maintain approximately 30% of its interest-bearing borrowings at fixed interest rates.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s and the Company’s profit before tax (through the impact on floating rate borrowings).

Group CompanyIncrease/

(decrease) in basis

points

Increase/ (decrease)

in profit before tax


in basis points


in profit before tax

HK$’000 HK$’000

31 December 2013RMB 27 (43,420) 27 –USD 27 (10,278) 27 (10,115)HKD 27 (410) 27 (410)

RMB (27) 43,420 (27) –USD (27) 10,278 (27) 10,115HKD (27) 410 (27) 410

31 December 2012RMB 27 (39,755) 27 –USD 27 (2,250) 27 (2,193)HKD 27 (1,092) 27 (1,092)

RMB (27) 39,755 (27) –USD (27) 2,250 (27) 2,193HKD (27) 1,092 (27) 1,092

Franshion Properties (China) Limited Annual Report 2013 259


46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)Interest rate risk (Continued)The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the end of the year and had applied the exposure to interest rate risk to those bank and other borrowings in existence at that date. The estimated percentage increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the year until the end of the next reporting period.

Foreign currency riskAll of the Group’s turnover and substantially all of the Group’s operating expenses are denominated in RMB, which is currently not a freely convertible currency. The PRC Government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of Mainland China. Shortages in the availability of foreign currencies may restrict the ability of the Group’s PRC subsidiaries to remit sufficient foreign currencies to pay dividends or other amounts to the Group.

Under existing PRC foreign exchange regulations, payments of current account items, including dividends, trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate PRC Governmental authorities is required where RMB is to be converted into foreign currencies and remitted out of Mainland China to pay capital account items, such as the repayment of bank loans denominated in foreign currencies.

Currently, the Group’s PRC subsidiaries may purchase foreign currencies for settlement of current account transactions, including the payment of dividends to the Company, without the prior approval of the State Administration of Foreign Exchange. The Group’s PRC subsidiaries may also retain foreign currencies in their current accounts to satisfy foreign currency liabilities or to pay dividends. Since foreign currency transactions on the capital account are still subject to limitations and require approval from the State Administration of Foreign Exchange, this could affect the ability of the Group’s subsidiaries to obtain the required foreign currencies through debt or equity financing, including by means of loans or capital contributions.

The Group’s financial assets and liabilities are not subject to foreign currency risk, except for certain short term deposits denominated in United States dollars. The fluctuations in the exchange rates of RMB against foreign currencies could affect the Group’s results of operations.

There are limited hedging instruments available in Mainland China to reduce the Group’s exposure to exchange rate fluctuations between RMB and other currencies. To date, the Group has not entered into any hedging transactions in an effort to reduce the Group’s exposure to foreign currency exchange risk. While the Group may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited, and the Group may not be able to hedge the Group’s exposure successfully, or at all.



46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)Foreign currency risk (Continued)The following table demonstrates the sensitivity at the end of the reporting period to a reasonably possible change in the exchange rate between HK$ and United States dollars (“US$”) on the Group’s profits for the years ended 31 December 2013 and 2012.

Group

Increase/(decrease) in US$ rate

Increase/(decrease)

in profit for the year

Increase/(decrease)


2013 2012HK$’000 HK$’000

+1% (156,181) (77,908)-1% 156,181 77,908

The following table demonstrates the sensitivity at the end of the reporting period to a reasonably possible change in the exchange rate between RMB and US$ on the Group’s profits for the years ended 31 December 2013 and 2012.

Group

Increase/(decrease) in US$ rate

Increase/(decrease)


Increase/(decrease)


2013 2012HK$’000 HK$’000

+5% (14,998) (10,056)-5% 14,998 10,056

Credit riskCredit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk arising from its land development revenue, the sale of properties, leasing activities, the provision of hotel and property management services and its financing activities, including deposits with banks and financial institutions and derivatives. Credit risk is managed by requiring tenants to pay rentals in advance. Outstanding tenants’ receivables are regularly monitored. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial asset.



46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)Liquidity riskDue to the capital intensive nature of the Group’s business, the Group ensures that it maintains sufficient cash and credit facilities to meet its liquidity requirements. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and other interest-bearing loans. In the opinion of the directors, most of the borrowings that mature within one year are able to be renewed and the Group is expected to have adequate source of funding to finance and manage its liquidity position.

The maturity profile of the Group’s financial liabilities as at the end of the reporting period, based on the contractual undiscounted payments, is as follows:

Group

2013

Within 1 year or

on demand

More than 1 year but less than

2 years

More than 2 years but

less than 5 years

More than 5 years Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Interest-bearing bank and other borrowings 7,802,200 3,522,464 21,120,597 11,365,997 43,811,258

Trade payables 5,304,170 – – – 5,304,170Other payables 4,120,324 – – – 4,120,324Due to related parties 3,443,604 – – – 3,443,604

20,670,298 3,522,464 21,120,597 11,365,997 56,679,356

2012

Within 1 year or

on demand

More than 1 year but

less than 2 years


less than 5 years


HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Interest-bearing bank and other borrowings 10,341,133 3,412,558 11,763,998 9,360,132 34,877,821

Trade payables 2,525,712 – – – 2,525,712Other payables 3,634,490 – – – 3,634,490Due to related parties 99,634 – – – 99,634

16,600,969 3,412,558 11,763,998 9,360,132 41,137,657



46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)Liquidity risk (Continued)Company

2013

Within 1 year or

on demand

More than 1 year but less than

2 years


less than 5 years


HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Interest-bearing bank and other borrowings 928,757 522,296 4,595,643 – 6,046,696

Other payables 12,002 – – – 12,002Due to subsidiaries – – 15,197,718 – 15,197,718Due to related parties 3,334,435 – – – 3,334,435

4,275,194 522,296 19,793,361 – 24,590,851

2012

Within 1 year or

on demand

More than 1 year but

less than 2 years


less than 5 years


HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Interest-bearing bank and other borrowings 2,515,368 – – – 2,515,368

Other payables 8,900 – – – 8,900Due to subsidiaries – – 11,377,681 – 11,377,681

2,524,268 – 11,377,681 – 13,901,949

Capital managementThe primary objectives of the Group’s capital management are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.

The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, issue new shares or sell assets to reduce debt. The Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2013 and 31 December 2012.



46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)Capital management (Continued)The Group monitors capital on the basis of the debt-to-adjusted-capital ratio. This ratio is calculated as net debt divided by adjusted capital. Net debt is calculated as total interest-bearing bank and other borrowings (as shown in the statement of financial position) less cash and cash equivalents, restricted bank balances and pledged deposits and certain other financial assets included in current assets. Adjusted capital comprises all components of equity (including non-controlling interests) and amounts due to related parties. The Group aims to maintain the debt-to-adjusted-capital ratio at a reasonable level. The debt-to-adjusted-capital ratios as at the end of the reporting periods were as follows:

Group2013 2012

Notes HK$’000 HK$’000

Interest-bearing bank and other borrowings 32 35,806,135 28,275,422Less: Cash and cash equivalents 28 (14,489,962) (12,888,442) Restricted bank balances and pledged deposits 28 (303,400) (575,983) Certain other financial assets included in current assets 27 (22,576) (123,330)

Net debt 20,990,197 14,687,667

Total equity 47,219,456 34,502,830Add: Amounts due to related parties 26 3,443,604 99,634

Adjusted capital 50,663,060 34,602,464

Debt-to-adjusted-capital ratio 41.4% 42.4%

47. APPROVAL OF THE FINANCIAL STATEMENTSThe financial statements were approved and authorised for issue by the board of directors on 26 February 2014.

46. financial risk management objectives and...

Documents